Leading Vs. Lagging Indicators
In the world of technical analysis, there are many, many lagging indicators. Colorful lines are automatically plotted directly on the price chart or in a separate window below the chart. Most of these indicators and oscillators are taking the price data from the chart and display it in an alternative form. Though these squiggly lines are called by different names, they are all really doing the same thing, they are simply reflecting the current price action. There is no new information being displayed on the chart. And the more indicators that you apply to your chart, the more duplication you have of the same information. What we need to do is to add new, leading information.
In addition, these lagging indicators are only as good as the last bar of data displayed on the chart. Typically they don’t extend past the last bar of price data. Conversely, there are technical drawing tools available that provide information that extends past the last bar of data. An example of this would be a trendline. A trendline uses current and previous price action to project a line off into the future past the last bar of data on the chart. Many charts will display the last bar of data right up against the price axis without any “white space” between the price axis and the last bar of data. If possible, change the settings on your software to display some white space so as to view the future projections of your leading indicators.
Now that we have made some white space to work with between the price axis and the last bar of price data, we can use some leading indicators to make an educated guess as to what might happen in the future. The white space is the canvas of the technician. We are now able to paint a picture of what we think the future might look like. Using market geometry, we can use different technical drawing tools to make projections based on trend lines, pattern recognition, and support and resistance levels based on Fibonacci numbers. We will consider Fibonacci numbers in more detail in a future article.
Ross Beck, DMS, FCSI